Digital Banking Channels, Financial Inclusion and Commercial Bank Sustainability in Kenya

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The increasing use of digital banking channels has transformed the financial landscape globally, including in Kenya. While digital banking is believed to enhance financial sustainability, the role of financial inclusion in explaining this relationship remains unclear. Previous studies have examined the impacts of digital banking and financial inclusion separately, but little research has explored how financial inclusion influences the link between digital banking and financial sustainability in commercial banks. This study explored the relationship between digital banking channels, financial inclusion, and the financial sustainability of commercial banks in Kenya. Specifically, it investigated whether financial inclusion explains the relationship between digital banking and financial sustainability. The study applied the Transaction Cost Theory (TCT) in evaluating how financial inclusion explains the relationship between digital banking channels and financial sustainability. The study used a quantitative research design with secondary data from Kenyan commercial banks between 2018 and 2023. Data were analysed using various econometric models, including Generalized Method of Moments (GMM) and Ordinary Least Squares (OLS), to assess the relationships between digital banking channels, financial inclusion, and financial sustainability. The findings showed a significant positive relationship between digital banking channels and financial sustainability, with mobile banking having the strongest impact. Financial inclusion also significantly improves as digital banking adoption increases. Moreover, the study revealed that financial inclusion partially explains the relationship between digital banking and financial sustainability, indicating its important role in enhancing the effectiveness of digital banking. This study highlights the critical role of financial inclusion in strengthening the impact of digital banking on the financial sustainability of banks. The results suggest that banks should prioritize both digital banking and financial inclusion strategies to achieve long-term financial health. The findings contribute to a deeper understanding of the interconnectedness between digital banking, financial inclusion, and sustainability, with implications for both banking practice and policy development.